What is an Annuity?
An annuity is a contract between an investor and an insurance company purchased by the investor through either a single payment or a series of payments. Annuities can be either immediate, meaning that income and return of principal begin
to be paid immediately, or deferred, meaning assets accumulate tax-free until withdrawals are made. Withdrawals are subject to federal income tax at ordinary income tax rates and may also be subject to state taxation. If money is
withdrawn before the investor reaches the age of 59 ½, it may be subject to a 10% penalty in addition to ordinary income taxes. Deferred annuities are most suitable for long-term goals such as planning for retirement. Variable annuities are
not generally suitable for short-term goals because you will pay substantial taxes and charges or other penalties if you withdraw your money early. For most investors it is advantageous to make the maximum allowable contributions
to IRAs and 401(k) programs before investing in an annuity.
When you purchase a deferred annuity within a tax-qualified retirement plan such as an IRA or 401(k), you get no additional tax advantage from the annuity since earnings and income in such a plan are already tax-deferred. You should consider
purchasing an annuity within a tax-advantaged retirement plan only if it makes sense because of the annuity’s other features such as lifetime income payments and death benefit protection.
There are three basic types of annuities, fixed, variable, and indexed.
With all types of annuity, please carefully read the contract and offering material, including the current prospectus, and consult with your Financial Advisor before investing.
Fixed Annuities
Fixed annuities guarantee
an interest rate for a period of time, generally 3 to 10 years, and some contracts offer guaranteed minimum rates of return for the life of the contract. Fixed annuities are not subject to fluctuation in value as are variable annuities. Both principal
and interest earned are backed by the financial strength of the issuing insurance company.
Variable Annuities
Variable annuities are complex investment vehicles that combine features of both insurance contracts and mutual funds. An investor in a variable annuity can choose from a wide range of mutual fund like investment
portfolios, usually referred to as subaccounts. These subaccounts, with varying investment objectives and risk levels, can invest in stocks, bonds and money market instruments. Similar to mutual funds, the investment returns of these subaccounts fluctuate
with market conditions. It is possible to experience a loss on your investment in a variable annuity.
As noted above, earnings within a deferred annuity grow on a tax-deferred basis. Income taxes that would have been paid
on capital gains, interest or dividends, are deferred until they are withdrawn from the contract. The value of a variable annuity may grow faster than a taxable investment with a similar rate of return, because money that would have been used to pay
these taxes remains invested. It is important to realize however that when you withdraw money from a variable annuity, any portion subject to tax will be taxed at ordinary income rates rather than the lower tax rates that are currently applicable to long-term capital gains and certain dividends.
Therefore the benefit of tax deferral may outweigh the costs of a variable annuity only if you use the annuity for goals such as long term retirement planning.
Variable Annuities offer many optional features that you may
want to consider such as minimum death benefit and minimum living benefits. These features are backed by the financial strength of the issuing insurance company. They may be part of the contract or you may elect them at the time of
purchase. Each optional feature that you choose typically carries a charge.
Indexed Annuities
An indexed annuity is a type of annuity contract between you and an insurance company. This annuity combines features of securities and insurance products. The insurance company credits you
with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index.
An indexed annuity’s return is calculated over the course of a specified period of time. These time periods are typically twelve months long, but can vary.
Indexed annuity contracts describe both how the amount of return is calculated and what indexing method they use. Based on the contract terms and features, an insurance company may credit your indexed annuity with a lower return than the actual index’s gain. If the annuity exposes your investment to some risk of loss, you could lose more money in your indexed annuity when the market index goes down than the index loses.
Indexed annuity contracts allow the insurance company to change these features periodically. Read your contract carefully to determine what changes the insurance company may make to your annuity.
It is possible to lose money when investing in index annuities. If market performance is negative with no interest credited to your annuity and you have selected an optional benefit, you would see a decrease in your annuity value to cover the costs
of the benefit.
Understanding How Janney and Your Financial Advisor are Compensated Janney and its Financial Advisors receive compensation when you invest in annuities. The amount of compensation varies based on the type of annuity, the issuing insurance
company and the amount invested. You should discuss with your Financial Advisor the form of compensation she or he receives. Depending on the type of annuity selected compensation may be in the form of a commission from the insurance carrier or from
a fee if an advisory annuity is purchased. The commission is typically a percentage of the amount invested. In the case of commission-based annuities, Janney and its Financial Advisors may receive ongoing payments from insurance companies which are
known as “trails.” When a Client invests in an advisory based annuity, the asset is included in the assets under management when calculating the advisory fee.
Janney and our Financial Advisors may also receive other forms of compensation that do not directly affect the amounts our clients are charged for annuity transactions, including revenue sharing arrangements and promotional assistance. These forms of
compensation are meant to cover a variety of initiatives and expenses incurred by Janney, including expenses associated with marketing annuities to investors, educating Financial Advisors, and performing administrative services for clients. Insurance
companies may also enter into revenue sharing arrangements with Janney in connection with the distribution of their annuities through our Financial Advisors. Since not all insurance companies who distribute annuities through Janney elect to
participate in a revenue sharing arrangement with Janney, there is a greater financial incentive to promote those insurance companies that do offer additional compensation.
Revenue Sharing Arrangements
Janney incurs
a variety of expenses in connection with educating its Financial Advisors and clients regarding annuity investments, and providing marketing and sales support to insurance companies. Insurance companies may enter into revenue sharing arrangements
with Janney in connection with the distribution of their annuities through our Financial Advisors. Under a revenue sharing arrangement, an insurance company will agree to pay Janney a portion of the revenue generated from the sale and management of
annuities in clients’ accounts. Where Janney has entered into a sales-based revenue sharing arrangement with a particular insurance company, Janney typically requests a fee equivalent to .20% of the participating insurance company’s gross
sales made through Janney during a given timeframe. Our Financial Advisors do not directly share in the fees received by Janney pursuant to its revenue sharing arrangements.
The revenue share payments to Janney are from the insurance company or its affiliate and are in addition to commissions received. No revenue sharing payments are received with respect to group annuities held by retirement plans maintained on the annuity
provider’s recordkeeping platform.
Janney requests a standard fee schedule upon all insurance companies whose annuities are sold through Janney based on an annual percentage of new or gross sales of 0.20% (20 bps), however they range from 0.10% (10 bps) to 0.20% (20 bps) where agreements
exist. Other insurance companies who distribute annuities through Janney may elect not to participate in a revenue sharing arrangement with Janney.
Janney has a conflict because it has financial incentive to recommend annuities where a
revenue sharing agreement is in place, or because the sharing is at a higher than standard fee schedule. Our Financial Advisors are not required to recommend any product of an insurance company that provides additional compensation, nor do they
directly share in any of the marketing support fees received.
Janney has entered revenue sharing agreements with the following insurance companies with respect to certain annuity policies offered to clients:
Allianz
AIG Financial
AXA
Global Atlantic
Jackson National Life
Lincoln Financial
Brighthouse Financial
Nationwide
New York Life
Pacific Life
Prudential
Riversource
Symetra
Transamerica
The revenue share payments to Janney are from the insurance company or its affiliate and are in addition to commissions received. During calendar year 2019, Janney received a total of $541,992 in revenue sharing payments from insurance companies. No revenue
sharing payments are received with respect to group annuities held by retirement plans maintained on the annuity provider’s recordkeeping platform.
Promotional and Educational Assistance
Janney, our Financial Advisors and our clients may, from time to time, receive from insurance companies and their marketing representatives (known as wholesalers) occasional nominal gifts,
meals, tickets to sporting events or other comparable entertainment, or payment or reimbursement in connection with conferences or meetings held for the purpose of training or educating clients, prospective clients or Financial Advisors. From time
to time, our Financial Advisors may also be invited to attend conferences or meetings sponsored by insurance companies. These activities are also intended to result in the promotion of the insurance products marketed by the wholesalers.
Making an Appropriate Choice
Your
Janney Financial Advisor can further explain the various types of annuities to assist you in making an appropriate choice to match your investment time horizon and investment objectives.
Not all insurance company policies are the same,
therefore, it is essential that you carefully read the variable annuity prospectus which outlines specific information concerning fees and expenses before investing.
Fees and Charges Associated with Annuities
You should consider any other charges and fees, including mortality and expense charges, administrative charges, investment management fees, and any applicable 12b-1 fees associated with the portfolio options. These charges and fees will reduce the value of the annuity position and your return on investment. If a rider or other optional feature is selected, there will be an additional cost.
Fixed Annuity Fees and ChargesWhen you invest in a fixed annuity, your money is placed in the general account of the insurance company. When setting the rate of return credited to the annuity contract, the company considers
prevailing market rates and also the costs of issuing and maintaining the annuity contracts. In addition to the surrender charges discussed below, some contracts may charge an annual maintenance fee, which can range from $25 to $30.
Variable Annuity Fees and Charges
In
addition to the surrender charges discussed below, variable annuities have other expenses you should be aware of as these expenses will reduce your return and, therefore, the value of your account. These fees and costs are provided as examples.
Please consult the disclosures associated with your specific annuity for details.
- Mortality and Expense Risk Fee (M & E) - typically 1.25% to 1.60% annually. This charge is equal to a percentage of your account value and can be used by the insurance company to offset the costs of distributing the variable annuity, such as commission
paid to your Financial Advisor. It is also used to compensate the insurance company for certain risks that it assumes under the variable annuity contract.
- Administrative Fees - a flat fee (typically $30) or a percentage of the account value (typically 0.5%.) The insurer may deduct this charge to cover administrative expenses such as record keeping. The flat dollar charge may be waived, typically on
accounts above $50,000.
- Subaccount Expenses - typically 0.5% to 1.5% annually. These fees and expenses, charged by the underlying investment managers in the variable annuity, are similar to the fees and expenses charged by mutual funds. These expenses include annual operating
expenses such as management fees, distribution fees (referred to as 12b-1 fees) and other expenses.
- Other Fees and Charges - Certain features offered in variable annuities such as additional death benefits, living benefits and bonus credits often carry additional charges or lead to a higher Mortality and Expense Risk Fee. In addition, there can
be a charge for transferring from one investment option in your annuity contract to another. The costs associated with variable annuities are generally higher than costs of mutual funds.
Indexed Annuity Fees and Charges
- Indexed annuities typically do not charge mortality and expense, administration or investment management fees, but In addition to the surrender charges discussed below, index annuities often have other expenses you should be aware of:
- Market Value Adjustment - Some carriers impose a market value adjustment if you surrender your annuity early. Generally, if interest rates have increased since you purchased your annuity, you may have a fee assessed to your annuity value. If
interest rates declined since your annuity was a purchased, you may receive a credit to your annuity value. The adjustment may be positive or negative. Annuity carriers will have different methods for calculating a market value adjustment, so
make sure you understand the market value adjustments for the specific annuity you are purchasing.
- Other Fees and Charges – Some index annuities offer additional death benefits and living benefits that carry additional charges. The annuity contract details all associated rider costs and how they are calculated. Surrender Charges
If
you withdraw money from or surrender your contract within a certain period of time after investing, usually three to nine years, the insurance company will assess a surrender charge. Usually this charge decreases and over time
disappears altogether. For example, a surrender charge may be 7% if surrendered in the first year, 6% in the second year and so on until after seven years there is no surrender charge. Some annuity contracts impose surrender charges based on the
initial purchase, while others apply a new surrender charge period that applies to each subsequent premium or investment made.
Typically, contracts allow you to withdraw part of your account value each year without a surrender charge.
This amount may be equivalent to interest earned or a percentage of contract value up to 10%.
A detailed description of the charges contained in a variable annuity can be found in the prospectus.
What if I change my mind?
You may cancel your contract within a short period (usually lasting at least 10 days) of receiving it without a surrender charge. Upon cancellation, you will typically receive a refund of your purchase payments. The refund may be adjusted up or down to
reflect the performance of your investment options. The length of the free look period will also vary depending on the state where you signed your application.
1035 Exchanges
In some cases you may wish to exchange an existing annuity contract for a new annuity contract that has features that you prefer. There can be benefits to what is called a "1035 exchange," which refers to a provision in the U.S. tax code that permits
a direct transfer of funds in a life insurance policy, endowment policy or annuity policy to another policy without tax consequences. If you exchange contracts, you will be required to pay surrender charges on the old annuity if you are still in the
surrender charge period. In addition, a new surrender charge period may begin when you exchange into the new annuity.
If you are thinking about an exchange, you should compare the two annuities carefully. While the features may appear similar, you should consider the fees (insurance feature fees, as well any new surrender charge period), investment restrictions, and
benefits and risks of the new variable annuity as compared to your current variable annuity.
Additional information about annuities is available at:
Securities and Exchange Commission
FINRA